Wednesday, February 6, 2008

Sleepwalking into the next energy crisis...

I've done a lot of work for the energy sector and ever since reading The Prize, I have taken a keen interest in oil-related events. Oil is the fuel that drives everything we do. 95% or so of transportation fuels come from oil. Without it, trains, planes, and automobiles (even smugly-driven Prius) grind to a halt. People have no idea of the importance of a single gallon of gas (500 man hours of labor) and how CHEAP it still is (less than 20 cents a cup; a fraction of what your morning frapa-whacka-chino costs).

The first target of everyone's ire is the Oil Majors. Chevron, ExxonMobil, Shell, BP and ConnocoPhilips are refered to as the International Oil Companies (IOC's for short) within industry. This is who Joe Blow sees whenever on the sign when he fills up his DoublewideTrailer with 22" rims SUV. What he doesn't understand is less than half the oil he's about to pump comes from the IOC's. The other half comes from Nationalized Oil Companies (NOC's) like Saudi Aramco, Mexico's PEMEX, Venesuela's PDVSA, or Norway's StatOil/NorskHydro. In order to provide the consumer with enough gasoline, the IOC's have to buy from the NOC's (at retail prices). Because the consumer is such a cheap bastard when it comes to buying gas (people will drive all over town to save a nickel), the price of gas hasn't kept up with the rise in crude oil prices. In addition to SEC regulation preventing exploration and production divisions of IOC's from sharing profits with refining divisions, the oil companies are getting crunched. BP is cutting 5,000 jobs.

Everyone's eyes widen when they hear Exxon makes more than $1,000 a second in profits, but what they don't see is the oil industry is the most capital intensive business out there. The capital costs are so high, you damn well better be making lots of money!

The most serious threat to the IOC's, IMO, is the critical shortage of talent. Personnel costs have skyrocketed. Most new wells are extremely deep (15,000+ feet) and need weeks to drill at rates upwards of $250,000 a day. Drilling costs doubled from 2003-2006, driven largely by personnel costs. It's hard, but not impossible, to get your hands on a drilling rig. Keeping it fully staffed with experienced crews running 24/7 is damned near impossible. Salaries have exploded as a result. Houston, the energy capital of the world, has become a town of mercenaries; people just leave after 3 months because they get an extra $1.50 an hour. That's been going on for the past 2-3 years now and salaries are up 50-100%. For the companies, it's only going to get worse. I can't find it now, but I remember reading that 50% of one of the IOC's geology and engineering staff will be eligible to retire by December 2009. New projects get more and more complicated with fewer and fewer engineers to work on them. Demand for engineers is going up 40% per year with no end in sight. Just imagine how desperate companies are going to get to retain talent then. It's great for individuals, but it's sapping the industry's ability to get shit done. Projects keep missing deadline after deadline.

All the efforts of oil companies can't even replace the oil they're pumping. The oil companies are running flat out just to stay in place, and even then they are slowly sliding backwards on the treadmill. Chevron only replaced 10-20% of its reserves last year. If that doesn't change, then Chevron (and all the other IOC's) will eventually cease to exist.

Well, what about Saudi Arabia? Aren't they sitting on oceans of the stuff? No, even Saudi Arabia's oil reserves are limited (and might be more limited than anyone thinks). Our idiot president accidentally (or not?) dropped Saudi Arabia's biggest secret on national TV and nobody in the press was smart enough to realize what he was saying...

The US is slowly but surely heading into an energy crisis that will put the 70's oil embargos to shame. It's been coming for 50 years and, though quite a few people have known about it, little has been done to prepare. This nation hasn't had a coherent energy policy since the Carter administration. Well, one way or the other, the next president will have an energy policy that reduces American dependence on oil.

NOTE- The last real oil shock happened before I was born. I only know a little about the oil bust that hit the energy sector in the early 80's. Anyone got any memories of the 70's oil embargo's? I'd love to hear them. Everyone I've talked to seems to have blocked them out of their memory...

2 comments:

Maitri said...

Good post, Clay. I have a post cooking on IOCs and our lot in life; it really meshes with this one.

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